Congress’s intent was clear: PPP loans were to be forgivable, and the forgiveness was to generate tax-free income for borrowers. The IRS had other ideas and contradicted congressional intent. The IRS has taken the position that borrowers who expect their PPP loan to be forgiven cannot deduct the expenses (e.g. payroll) that helped generate the forgiveness.
What does this mean for me?
If, for example, you received a $20,000 PPP loan that is fully forgiven, it will technically generate tax-free income. However, you will also have $20,000 in previously deductible expenses that now must be considered non-deductible. The tax effect of the tax-free PPP and the non-deductible expenses effectively cancel each other out, leaving you with $20,000 of taxable income. This is clearly not what Congress intended when they passed the CARES Act.
What can I do about it?
Tell your members of Congress to support small businesses by quickly passing S. 3612 and H.R. 6821, the Small Business Expense Protection Acts of 2020, or H.R.6754, the Protecting the Paycheck Protection Program Act.
This legislation will ensure that the receipt and forgiveness of PPP funds do not result in taxable income for organizations that complied with the terms of the PPP. The sooner this is passed, the sooner small businesses can approach year-end with certainty and clarity in what are already uncertain, unclear times.
Ok, what do I do?
Two easy steps:
- Look up the contact info for your US senators and representatives here: https://www.congress.gov/members
- In New York? Here’s a head-start:
- Copy and paste this message:
- I am writing you today to strongly encourage you to include in any year-end, must-pass legislation language that will allow millions of small business owners a tax deduction for expenses paid with Paycheck Protection Program (PPP) forgiven loans. Bills have been introduced in the Senate (S.3612 sponsored by Senator Cornyn (R-TX)) and in the House (H.R. 6821 sponsored by Representative Holding (R-NC) or H.R. 6754 sponsored by Representative Fletcher (D-TX)) that would ensure that PPP loan recipients are provided the full benefits intended in the CARES Act. All Americans have been impacted by the COVID-19 pandemic, and your actions in Congress have provided much-needed assistance to millions of struggling businesses. It is important that you ensure that these same businesses are not also subject to additional and unexpected taxes as they continue to struggle to survive. Borrowers who are eligible for forgiveness of their PPP loans have spent the funds as the program directed. Unless they are allowed to deduct these expenses, they may be forced to spend additional funds to pay taxes on the loan proceeds – funds they may not have. Passing this legislation as quickly as possible will provide small business owners more certainty as they focus on year-end business planning that is especially important in these challenging economic times. I ask that you contact your Senate and House leaders to ensure that PPP loan forgiveness deductibility language is passed by Congress before the end of the year.
Ok, what next?
Let the legislative process work and hope for the best! Every message to congress helps tip the scales. It’s our responsibility to help small businesses and to encourage our representatives in congress to do the same!